Shopping Weather?

S&P doesn't underestimate the ability of the American consumer to shop, but home heating bills could affect sales this season

By Joseph Lisanti

When mathematicians assume that the value of an unknown follows logically from a series of known values, it's called extrapolation. For most other people, projecting the future from current conditions is called guessing.

Guessing was rampant on Wall Street during the dot-com bubble. Because share prices surged for companies that had no earnings and little more than an idea for a business, many people guessed that we were seeing a new investment dynamic. They seemed to believe that as long as new dot-com companies went public to fuel the interest of speculators, the market couldn't tumble. The last bear market proved that theory wrong.

Lately, we've been hearing from a number of people that, because the weather so far has been fairly mild, we are not likely to suffer through a harsh winter. These predictions are not being made by professional meteorologists, most of whom are loath to forecast the weather more than a week ahead.

We don't know if the approaching winter will be mild or brutal. But as the season progresses, it's a good bet that many people will be turning up their thermostats. On average, the Energy Information Administration estimates that U.S. households using natural gas for heating will spend 41% more this winter than last. For homes that use heating oil, the average increase should be about 27%, according to the agency. As the driving season turns into the heating season, we suspect that many consumers will shift their focus from the lower cost of gasoline to the higher price of heating fuel.

Standard & Poor's expects that retail sales in this holiday period will likely rise 3.5% to 4%. That's less than the 6.7% increase reported for the 2004 holiday season by the National Retail Federation. But a cold winter that hits during the pre-Christmas shopping rush could cause some consumers to trim their gift budgets even more. We expect retailers will be watching the local weather forecasts closely this year.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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